State of Logistics: Slow growth, ‘elusive’ recovery

Business logistics costs rose 10.4 percent last year, totaling $1.21 trillion, which is about what American businesses paid for freight transport in 2010, according to the authoritative 22nd annual State of Logistics report released Wednesday.

Business logistics costs rose 10.4 percent last year, totaling $1.21 trillion, which is about what American businesses paid for freight transport in 2010, according to the authoritative 22nd annual State of Logistics report released Wednesday.

Logistics costs as a percentage of Gross Domestic Product (GDP) climbed to 8.3 percent last year, up from 7.8 percent in 2009 but still below the 9.9 percent registered in 2007 and 9.4 percent in 2008.

Transportation costs rose 10.3 percent from 2009 levels. Interestingly, trucking (which accounts for 78 percent of all freight transport on a revenue basis) continued to lag behind the other modes. Trucking costs rose 9.3 percent last year, compared to an average of 15.4 percent for the other freight modes combined.

“The recovery from the Great Recession has proven to be more elusive and prolonged than any other in our history,” said Rosalyn Wilson, the author of the SoL report sponsored by the Council of Supply Chain Management Professionals (CSCMP). “The slow growth presented another year of challenges for the logistics industry.”

Transportation costs ticked over the 10 percent last year after tumbling the previous two years. That’s because of higher freight volumes, fuel surcharges and what Wilson called “genuine rate hikes.”

“Freight volumes grew year over year, but unsteadily,” Wilson explained. “There were frequent spikes and valleys in the monthly tonnage, carload, intermodal and container data.”

In a warning to shippers worried about capacity, Wilson said that volumes have recovered only about half of their recession losses. But industry capacity, especially in the trucking and air freight modes, “is close to being fully engaged,” she said.

“The recession had a devastating effect on total industry capacity, which is much lower than it was in 2007,” Wilson said.

Trucking, the largest component of the transport sector, remains the slowest to recover. The cost of trucking rose 9.3 percent last year (9.5 percent for intercity and 8.8 percent in local delivery) with much of that increase coming from fuel surcharges.

“Motor carriers are being set up for the perfect storm,” Wilson predicted. “Capacity is still leaving the market; drivers are difficult to find and keep; truck order backlogs are growing; operating costs are rising while revenues are steady; and new regulations are on the way that will reduce productivity of drivers and trucks they do have. Couple this with rising freight volumes and the trucking sector could find itself unable to meet demand.”

Last year truck volumes “grew fitfully,” according to Wilson, with truck tonnage rising 5.7 percent last year “not even close to reversing the losses” of the last several years.

More than 16 percent of truck capacity has been “permanently removed” since the freight recession hit in 2006. In a warning on capacity, Wilson predicted bluntly: “Traffic levels are expected to rebound faster than the sector and will be able to respond and expand capacity.”

More than 3,000 trucking firms have declared bankruptcy in the past three years, accounting for 13 percent of total industry capacity. This figure includes only those carriers with at least five trucks, so the actual number of business closures “is actually much higher,” Wilson said.

Rails, on the other hand, are surging. Carloads rose 7.3 percent and there was a 14.2 percent surge in intermodal volume in 2010 from 2009. Rails more than made up for their 20 percent decline in costs last year by posting 21.8 percent gains. “Revenue rose steeply as the railroads had success in 2010 in raising rates and having them stick,” Wilson said. “That sector of the industry is very strong.”

And it could get stronger. Rails are in “very good shape” on capacity and the Class 1’s have continued to invest in equipment and personnel throughout the recession.

Costs for water rose 14.1 percent last year, but the ocean carrier sector is suffering from severe overcapacity. Spot rates have dropped 40 to 50 percent over the final quarter last year and the first couple of months of this year, the report said.

Air freight revenue rose 11.2 percent last year, although volumes tailed off at the end of the year. Air cargo capacity has shrunk 12 percent, however.

Looking ahead, Wilson said it appears the U.S. economy is “stalling.” She said the economy has been “in a fragile state for close to four years now and the highly touted recovery in some sectors” has not transferred to less robust areas.

“We may have hit a wall,” she said. “It’s been close to two years since the recession was pronounced over (but) for many Americans, things have not improved.”

A panel of experts commented on the impact of the data and what they see on the ground.

Jeff Pilof, group vice president of Macy’s logistics and operations, said “volatility is a reality,” in today’s supply chain marketplace. “All supply chains, no matter how good we do, are fraught with inefficiencies. There is always work to be done.”

Pilof said Macy’s has made a big shift toward intermodal rail, saving as much as 50 cents a mile in line-haul costs at today’s inflated fuel prices.

Joe Gallick, vice president of sales for Penske Logistics, a leading 3PL, said the logistics industry has been “admirably resilient” as it has coped with sharply higher fuel costs, vulnerabilities to the worldwide supply chains, high unemployment and other factors.

“Looking long-term, it’s inevitable we will start to feel the impacts of the capacity leaving the marketplace and the driver issue,” Gallick said. “We will solve it. The companies that stand to benefit from it will be those companies that are well run.”

“We saw steady improvements throughout the year last year,” said John Lanigan, executive vice president and chief marketing officer for BNSF Railway. “But this year our high water mark came in March. What we have seen throughout this year is decent growth on the consumer side of the business, but unevenness on the automotive side. It’s very choppy.”

Still, Lanigan said BNSF is planning on hiring 5,000 additional workers, with perhaps 60 percent of those hires being military veterans. “We’re betting on the future that freight is going to come,” Lanigan said.

John D. Porcari, deputy Transportation Secretary, said transportation is a high priority in the Obama administration. “If some good comes from the Great Recession, it’s the renewed emphasis on investment to make our country stronger,” he said.

“Transportation hasn’t been on the front burner of an administration since the Eisenhower administration,” Porcari said. “Transportation is a means to an end, not an end to itself. Transportation is a foundational investment.”

June 15, 2011

About the Author

John D. Schulz

John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. John is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis.

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